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ExxonMobil Remains Neutral

We reaffirmed our Neutral recommendation on ExxonMobil Corporation (XOM), the world’s largest publicly traded oil company, on May 13, 2013. The company’s diversified operations across the world with several new projects expected to come online through 2013 will boost earnings going forward. However, the company’s continued disappointing production trend remains a concern.

Why Maintained?

ExxonMobil is the world’s best run integrated oil company given its track record of superior return on capital employed. The company is in excellent financial health and has an AAA credit profile. Free cash flow generation remains strong and for investors seeking a defensive name with continued dividend growth have long considered the company has a core holding.

ExxonMobil is fairly active in its investment program. The company plans to spend about $185 billion over the next five years — up 29% from the last five-year period. The capex covers as many as 21 important oil and gas projects currently under the anvil that are estimated to accumulate over 1 million net oil-equivalent barrels per day by 2016. These include the Kearl Oil Sands development project in Canada, four in West Africa and Kashagan Phase 1 in Kazakhstan.

ExxonMobil is also engaged in a large liquefied natural gas project in Papua New Guinea, which is expected to begin deliveries in 2014. It will further unearth more oil from the development of Hebron oil field, offshore the Canadian province of Newfoundland and Labrador. The development will help in recovering over 700 million barrels of oil and the platform is expected to yield its first oil toward the end of 2017.

Exxon’s joint venture with Rosneft will allow the joint development of mature oil fields in Western Siberia and is likely to add acreage of about 150 million, which could unlock about 36 billion barrels of oil reserves in the unexploited Russian offshore province.

However, we remain skeptical due to the company’s continued disappointing production trend. Its first-quarter 2013 production level decreased 3.5% year over year. We see ExxonMobil struggling to consistently grow production volumes, which have been decreasing for the last 7 quarters.

Other Stocks to Consider

While we prefer to remain on the sidelines for ExxonMobil, there are other stocks in the sector that appear more rewarding. These include Dawson Geophysical Company (DWSN), Enerplus Corporation (ERF) and Exterran Holdings, Inc. (EXH), which are expected to outperform over the next few months and carry a Zacks Rank #1 (Strong Buy).